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Shooting for no. 1.

SHOOTING FOR NO. 1

Eight years ago, John Paul McKay Jr. owned the leading real estate firm in Little Rock. McKay & Co. was selling about $33 million in property, which represented about 20 percent of the market then.

The company, now led by Randy Alexander, is still the leading player in Little Rock residential sales and remains McKay's biggest claim to fame. However, McKay hasn't been affiliated with the firm since 1982 when he sold the residential arm of McKay & Co. along with the corporate name to Alexander.

After several detours, McKay is back devoting his full energies to real estate sales with another outfit he formed: Prudential-McKay Properties. The 49-year-old businessman has set his sights on returning to the top of the real estate scene and eclipsing his past success with McKay & Co.

He is on a five-year mission with a simple, though lofty, objective for his new real estate firm. "It's to be No. 1 [in terms of market share], whatever it takes," states McKay.

Is Prudential-McKay Properties destined to become the next Block Realty or Fausett & Co., old-line real estate firms that enjoyed decades of power and profitability before disintegrating?

A group of 36 investors has close to $1 million riding on the outcome of McKay's latest venture. His salesmanship was convincing enough to win their trust and money to bankroll his real estate firm through JPM Properties Ltd.

Or will McKay's firm go the way of Agar Realty, which rode a meteor of success that burned out in 1989 after three years in business?

Nearly $1 million is a lot of money to raise for a real estate startup, but $527,000 of it went to McKay directly, or McKay affiliates, to pay off old debts, McKay's fee for establishing the partnership and related startup costs.

McKay even charged the partners $100,000 for a non-compete clause should he ever decide to leave the new company.

According to the prospectus prepared for the limited partners, the new company expected to have $157,000 in working capital left over at the end of the first year's operations. But commercial real estate sales projected at $350,000 were only 22 percent of expectations, leaving a potential cash-crunching shortfall.

McKay says residential sales were solid and above expectations, but some wonder how much cash is on hand. McKay and the 36 partners will know the answer to that question within the next month or so when he mails out his annual report recapping the year's progress.

Jim Keet, Et Al

The stated goal of the limited partnership is to create the leading real estate firm in Pulaski County by 1994. In other words, the task at hand is to build the largest real estate company in Arkansas.

"I think John is the man who can take us there," remarks Jim Keet, the largest investor in JPM Properties.

Keet has a 14.8 percent stake in McKay's enterprise. This successful businessman and aspiring politician is sold on McKay's talents to the tune of $146,250. He also thinks the timing is right for such an investment.

"As is the case with any cyclical business, it's best to choose a business that's at or nearing the bottom of the cycle," Keet points out. "I viewed it as a good investment to be in an industry that will be around for some time to come. I did not get into this as a short-term investment. I look at this as a long-term investment in our community."

Cash distribution forecasts in the limited partnership offering look very enticing as well.

Those pro formas call for total net income per $19,500 invested of $41,508. Seven-year projections indicate an annualized return of 32.38 percent. That works out to a net return of $31,020 per share.

If McKay's venture succeeds, he'll be amply rewarded.

His compensation package at Prudential-McKay Properties begins with an annual salary package that reads this way:

* $60,000 in 1990;

* $80,000 in 1991;

* $100,000 in 1992;

* $120,000 in 1993;

* $140,000 1994-95.

McKay will also draw real estate commissions on whatever sales he personally handles. First Development and Investment Corp., wholly-owned by McKay, receives $10,800 annually on a seven-year lease of furniture and fixtures used by Prudential-McKay Properties.

Out Of The Starting Gate

The limited partnership route is somewhat of a rarity where Arkansas real estate companies are concerned. This method provided McKay with a war chest for growth while safeguarding his control of the company as the general partner.

"My philosophy is the market is changing, and there will be large companies and small companies without many in between," McKay reflects. "We could've approached our capitalization from a smaller perspective, but we want to be one of the big boys."

The company has made inroads on the market beginning with the purchase of Block Realty's North Little Rock listings in 1989. The demise of Agar Realty helped build the talent pool and eliminate a prime competitor as well. In 1990, Prudential-McKay acquired Rainey Realty's North Little Rock operation.

His internal tracking reflects the company started business in 1989 with a 3 percent marketshare in Pulaski County. He says that figure has grown to 8 percent at the end of 1990, close but still short of the company's goal of 9 percent.

"In terms of dollar volume sales, that probably puts us in the No. 5 position in Pulaski County," McKay states. "Breaking it down further, we are No. 2 in North Little Rock and No. 6 in Little Rock."

Projections call for the company to achieve marketshares of:

* 13 percent in 1991;

* 17 percent in 1992;

* 21 percent in 1993;

* 25 percent in 1994;

* And maintain the plateau in 1995-96.

According to McKay, about 88 percent of the company's 1990 income is generated through residential sales. That exceeded his projection of 78 percent for the year.

Commercial Sales Just 12 Percent

The downside is that commercial sales lagged behind expectations for a 22 percent performance and accounted for only 12 percent of 1990 income.

"In 1991, we're planning on putting our emphasis in residential sales," reveals McKay of his modified strategy to go where the action is.

That shift will increase the competition between Prudential-McKay Properties and other top firms like Randy Alexander's McKay & Co. Some folks aren't happy about having two McKay names in the market and the resulting confusion that occurs.

However, John McKay is free to re-enter residential sales. He had signed a five-year non-compete agreement, which expired in 1987, as part of the McKay & Co. sale.

"They're our biggest competitor," he says of McKay & Co. "The people who own and operate it do an excellent job."

The company identities are less confusing since the Prudential name was moved up to reflect the McKay Properties' national affiliation. Five other real estate companies reportedly vied for the Prudential franchise.

The benefits include ad support, volume buying, networking between brokers, financing for mortgages, systems and programs and additional name recognition. The cost of the seven-year franchise with Prudential breaks down this way:

* Initial franchise fee of $34,000 for the company's brokerage operations in west Little Rock and North Little Rock.

* Continuing royalty of 3-6 percent of all gross revenues.

* Monthly advertising fee ranging from $500 to $700 per location.

* Monthly software maintenance fee of $50 per location.

Prudential-McKay has been very aggressive on the advertising front, but there have been some cutbacks including dropping the Arkansas Democrat entirely. There may be a move to consolidate the company's property management operations elsewhere.

"There's some uncertainty to what the future will be concerning the Madison Guaranty Building," McKay remarks. "If Central Bank & Trust [the main tenant] stays there, then we will no doubt stay."

Days Gone By

McKay traces his interest in real estate back to his days as a teenager growing up in Clarendon, where his father operated a grocery store on the city square and moonlighted as a real estate agent.

"He showed me that he had made more money on one farm sale than the entire year of being in the grocery business," McKay recalls. "As a 15- or 16-year-old, that was a very important analogy in deciding a future career."

The aspiring Realtor headed for the University of Arkansas at Fayetteville where he majored in real estate and insurance. McKay began his career with Rector Phillips Morse in 1964, where he became a top producer. In 1972, McKay ventured out with two fellow brokers at RPM to create McKay-Askew-Shearin Realtors.

That partnership lasted until 1974 when McKay bought out Jess Askew and Jim Shearin to form McKay & Co. After selling the residential division to Randy Alexander in 1982, McKay kept the commercial division and struck up a joint venture with T.J. Raney and Sons.

McKay was to facilitate commercial real estate deals that Raney would syndicate to investors. The relationship lasted about 18 months, and insiders report the parting of the ways was not amicable.

He also had a brief stint as the president of Realty World-Block Realty, which didn't end on an upbeat note either. The company was already in its death spiral, and McKay didn't change that direction. Both Raney and Block Reality proved financially rewarding, however.

Along the way, there were side trips into the land of auto dealerships, insurance sales and an unsuccessful attempt to acquire a Coors distributorship.

McKay also picked up the nickname "Panda," a reference to his bearish physique. This warm and fuzzy moniker doesn't reflect his sometimes bearish moods.

He is also known as a guy who never met a new luxury car he didn't like. McKay is returning to his acknowledged area of expertise to fund his lifestyle and make his mark on the business scene.

"My expertise has always been in real estate although I have a securities license," McKay admits.

These days, the focus is on his real to him and Prudential-McKay's investors.

Table : Use Of Proceeds
Description Recipient Amount Percentage
Working Capital Various $401,000 41.1%
Organizations, FD&I Corp(*) $122,000 12.5%


Start-Up Costs

Purchase Of FD&I Corp. $105,000 10.8%

Real Estate Listings

Non-Compete FD&I Corp. $100,000 10.3%

Agreement
Block Co. John P. & $65,000 6.7%
Acquisition Rosemary
 McKay
Furniture, FD&I Corp. $51,000 5.2%


Fixtures, Equipment
Selling McKay $50,200 5.1%
Commissions Investments
Organization, Various $46,800 4.8%


Offering Expenses

Prudential FD&I Corp. $34,000 3.5%

Franchise Fee

Total $975,000 (*) - First Development and Investment Corp., wholly owned by John P. McKay Jr.

Table : JPM Properties Ltd.
Participants Investment
General Partners $9,850


John P. McKay Jr., McKay Properties Inc.

Limited Partners

James H. Keet III $146,250

LR

John Paul McKay Jr. $117,000

LR

Robert L. Moore $97,500

NLR

Max W. Hooper, trustee $78,000

Mindy L. Hooper Trust LR

Henry Law Firm, trustee $39,000

David P. Henry
A-H Partners, LR; $390,000
Dr. Joe T. Backus, LR; ($19,500 ea.)


William and Janis Brandon, LR; William P. Carlton, NLR; James R. Coffield, LR; Paul M. Hanson, Memphis; T. Stuart Harris, LR; Charles C. Hyde Jr., LR; Hillman and Donna Johnson, LR; Patty W. Lueken, Helena; Imogene Moore, LR; Lynn D. Moore, LR; Dr. R. Todd Plott, Maumelle; Ethel B. Roberts, LR; A. Richard Smith Co. Pension Plan, LR; James M. May Trust, LR; Pamela Finch, LR; Stephen G. Smith, LR; James A. Osborne, LR; Lewis W. Hyde, LR.
Jerry Bedford, LR; $107,250
Benton D. Brandon III, ($9,750 ea.)


LR; Timothy P. Daven, LR; Forrest C. Marlar Jr., NLR; Jeffrey P. McKay, LR; Media & Computer Services Inc., LR; Tom Stanton, LR; Russell H. Armstrong, LR; Ed Strohm, trustee Strohm & Powers Profit Sharing Plan, LR; Dr. Douglas E. Young, LR; JWS Corp., LR

Total $984,850

Profits and losses are allocated 99% to the limited partners and 1% to the general partners until the cash distributions to the limited partners equal 250% of their capital contributions ($2,437,500). There after the split is 50/50.

PHOTO : IN THE WORKS: John McKay Jr.'s latest deal is Cambridge Place Homes, a 4.01-acre proposed development off Pleasant Valley Drive in west Little Rock. The residential project would be a mixture of condos and patio homes in the $90,000 to $200,000 range. The deal is slated to be a joint venture with an as-yet-to-be-named builder.
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No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:realty firm McKay and Co.
Author:Waldon, George
Publication:Arkansas Business
Date:Feb 11, 1991
Words:2072
Previous Article:Industry fights back.
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